Is the Worst Behind Us?

Is the worst behind us?

Many investors are wondering this, and for good reason…

After all, stocks have been under major pressure lately.

The S&P 500 has fallen 8% since July, while the Nasdaq 100 has slid more than 9%.

The good news is that the bulls are showing up again.

Last week, the Nasdaq 100 closed up 0.1%. It was its first positive weekly close for the first time since late August.

The S&P 500 ended the week slightly down. But it closed Friday above its lows, and it managed to close above a key weekly level that dates back to August 22.

Many important sector and industry groups also rebounded last week.

The Consumer Discretionary ETF (XLY), which invests in stocks like Amazon (AMZN), Tesla (TSLA), and McDonald’s (MCD) ended the week up about 0.03%.

Semiconductors - one of the most important “bellwether” industry groups we track at The Discount, also performed well. The Semiconductor ETF (SMH) rallied 2% last week, good for its best performance since August.

Software stocks - another important group - also ended the week on a good note, as The Software Sector ETF (IGV) gained 0.2% on the week.

These obviously aren’t huge numbers. But it’s always encouraging when “risk on” groups like consumer discretionary and semis outperform the broader market.

In fact, the price action action that we saw last week could be setting the stage for a strong end-of-the-year rally.

We’ll explain why in a minute. But before we do that, we want to welcome you to The Discount Weekly. Each week, we examine the biggest issues facing traders and investors… and explain how they impact your portfolios.

Today’s issue is once again about the stock market… specifically why a strong year-end rally could be setting up. Let us explain…

The Market Is Entering one of the Strongest Periods of the Year

If you’ve been reading The Discount, you know we’re big believers in “seasonality”, or the idea that the stocks follow predictable patterns around the calendar year.

And last month was the worst month of the year for stocks. Historically, stocks have more than 1% on average during the month of September.

But it’s now October. And that means that stocks have just entered one of the strongest periods of the year.

Historically, the stock market has performed very well between October and January.

Of course, seasonality is just one piece of the puzzle. But there are other factors that suggest the stock market may be close to putting in some sort of bottom.

Sentiment has Been Reset in a Major Way

The stock market is an emotional rollercoaster.

It swings based on how fearful and greedy investors are feeling.

And after the market’s red-hot start to the year, many investors were starting to feel euphoric. Many became convinced that artificial intelligence (AI) would save stocks from high inflation, rising interest rates, and a possible recession.

The problem is that it’s hard to make money in stocks when everyone is bullish. That’s one of the reasons why the stock market stalled out over the summer.

Thankfully, investor sentiment has been reset in a major way. The graphic below says it all. Here, we’re looking at the CNN Fear Index. .

A high reading on this index indicates euphoria. A low reading occurs when the majority of investors are scared.

We can see that we’re now deep into fear territory. We’re actually bordering on Extreme Fear levels.

This is a pretty big deal.

Back in July, this indicator was much higher, signaling rampant greed.

In other words, the recent pullback in stocks has reset investor sentiment. It has wiped out a lot of the excess that we were seeing when leading AI stocks like Microsoft (MSFT) and Nvidia (NVDA) were hitting new all-time highs.

Having said all this, we’re not going to “all in” on stocks just because seasonality and sentiment have become more favorable.

As traders, we still need to see price action turn more favorable, and that just hasn’t happened yet.

It’s Too Early to Call a Bottom

The stock market is still a mess.

Remember, the S&P 500 didn’t close last week in the green. It just rallied off the lows.

The Technology Sector ETF (XLK), which is the biggest and most important sector, also ended last week down.

In short, it’s far too early to call any sort of bottom in stocks. We simply need to see more.

This is why we think the next couple weeks will be critical for the market. If the bulls show up, we could get that power end-of-the-year rally in stocks. If they don’t, expect market conditions to remain difficult.

To see how we’re playing these market conditions, be sure to join our free telegram channel

We also realize that messy market conditions like this can be frustrating. If you’re not careful, you can get really hurt trade this.

But there are ways to prevent this. Here are a few simple things anyone can do to survive the current market conditions.

Don’t Let Boredom Destroy Your Account

Don’t let many traders get bored in market conditions.

They get impatient and feel like they need to “do something.” And that can lead to disaster.

Forcing trades during poor market conditions can cause you to catch falling knives, or stocks that are still in strong downtrends.

You can also get chopped to pieces by taking small losses over and over again on poor setups.

To avoid these issues, wait for the market to start trending higher again before jumping back in. This approach will make your trading less stressful and more profitable.

Don’t Give into FOMO (Fear of Missing Out)

Social media is an endless source of FOMO.

Every day, traders are bragging out big wins they captured.

If you’re sitting on the sidelines, this can drive your nuts. It can lead you to chase green candles when you really should be waiting for the right “fat pitch” to come across your plate.

The best way to avoid succumbing to FOMO is to exercise discipline. In other words, develop a plan and stick to it.

It sounds so simple, but it works. Take it from experienced traders.

So, don’t get too upset if a stock makes a big move without you. There’s always another opportunity to take advantage of.

We also recommended tuning out most social media posts where other traders are bragging about huge gains. Instead, stick to your own system.

 It’s also important to understand that different traders have different styles. And very few styles don’t work all the time. There’s a time and place for everything

Consider swing trading. This is a popular approach where you a stock and hold it for a few weeks or months. It’s a great way to make money, but it usually only works when the broader market is also climbing.

Join us in our FREE Telegram Channel. We update our followers in real-time, with common sense analysis on the trades we are taking, currently in, and keeping our eye on. Common sense analysis that anyone, from beginner-to-advanced, can easily understand and take advantage of.

Don’t forget to follow us on YouTube for market updates as well.

P.S. - If you are interested in LIVE Trading, Monday - Friday mornings, we have a LIVE Day Trading Room with over 50+ professionals, intermediates and beginners. Give it a test drive 7 Days for $7 here.

See You Next Sunday!